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Pepsico to Buy Kentucky Fried From RJR Nabisco - $850-Million Deal Is Good for Both Firms--Analysts

July 25, 1986|NANCY RIVERA BROOKS | NANCY RIVERA BROOKS, Times Staff Writer

Pepsico said Thursday that it has agreed to buy Kentucky Fried Chicken, the nation's largest peddler of fast-food chicken, in an $850-million cash deal with RJR Nabisco.

Wall Street analysts said the transaction, which would create the world's biggest restaurant group, is a good move for both companies.

The sale is a plus for RJR Nabisco, they said, because the Winston Salem, N.C., company is focusing on its cigarette and packaged food business. The company has been shedding operations and paying off debt since R. J. Reynolds Industries bought Nabisco last year for $4.9 billion. The name was changed to RJR Nabisco in April.

The acquisition of the 6,500-outlet chain also is considered a savvy deal for Purchase, N.Y.-based Pepsico, which already owns the Pizza Hut and Taco Bell operations.

Kentucky Fried Chicken "is a strong performer, a leader in the restaurant business and a company with excellent potential," said J. Tylee Wilson, chairman and chief executive of RJR Nabisco. "However, it is our determination that we can best fulfill our corporate objective of assuring long-term growth of shareholder value by concentrating our resources and efforts in the packaged consumer goods business."

D. Wayne Calloway, Pepsico chairman and chief executive, called Kentucky Fried Chicken "an excellent strategic fit for Pepsico and a logical extension of our existing businesses."

Firms' Stock Climbs

"We're acquiring a highly successful company that has established itself as a leader in a very large and rapidly growing market," Calloway said.

RJR Nabisco's stock rose $3.25 to close at $52.62 1/2 on the New York Stock Exchange. It was the Big Board's sixth most active issue, with 1.8 million shares changing hands. Pepsico's stock closed at $33, up $1.50.

Kentucky Fried Chicken's 6,500 outlets, about two-thirds of which are franchises, have sales of $3.5 billion worldwide. RJR Nabisco reported that the unit's 1985 operating income was $91.5 million on sales of $1.14 billion.

Pepsico's 5,200 Pizza Huts and 2,300 Taco Bells, of which roughly half are franchises, have sales of $3.3 billion. Pepsico's restaurant group had earnings of $194 million on sales of $2.1 billion in 1985.

The acquisition would create a restaurant group with 14,000 restaurants and sales of $6.8 billion. McDonald's, of Oakbrook, Ill., has fewer restaurants at 9,060 but higher sales of $11 billion.

Pepsico also is buying a bit of Americana that was cooked up by Col. Harland Sanders in 1956, when he left the motel business to sell $100 franchises to use his special method for quick-cooking fried chicken. Sanders, who sold his business in 1964, died in 1980.

The $850-million sales price represents the unit's book value, an RJR Nabisco spokesman said. Analysts said the price was fair but not as high as the $1 billion some thought Kentucky Fried Chicken might fetch.

"This is a very unusual situation--it's good for just about everyone," said Emanuel Goldman, an analyst with Montgomery Securities in San Francisco.

Stanley H. Fishman, an analyst with Fahnestock & Co., said that RJR Nabisco "is still streamlining (itself) into a company that's going to be a producer of goods rather than a service organization. And what the hell, it won't hurt Pepsi either."

Goldman said he expects Pepsico to bring its merchandising expertise to Kentucky Fried Chicken, which currently sells chicken in three forms: original recipe, extra crispy and nuggets. "There's an awful lot you can do with chicken," he said.

Switch From Coke to Pepsi

Pepsico also faces the task of persuading most Kentucky Fried Chicken restaurant owners to switch to Pepsi beverages from the Coca-Cola products that they currently sell. A Pepsico spokesman said the switch could come slowly because of existing contracts.

The fast-food industry has become more and more competitive in the last few years, and Kentucky Fried Chicken has recently watched hamburger chains peck at its market by introducing fried chicken nuggets.

But the RJR Nabisco spokesman said Kentucky Fried Chicken is doing "very well," and Pepsico's Calloway said the chain "is ideally positioned to take full advantage of shifting consumer dietary and taste preferences that have steadily increase per-capita consumption of chicken."

The transaction still must receive final approval by the boards of directors of both companies and is subject to review by governmental agencies.

PEPSICO AT A GLANCE

Pepsico is the second-largest soft-drink producer worldwide. The company, based in Purchase, N.Y., also owns Frito-Lay, the snack food maker, as well as the Pizza Hut and Taco Bell fast-food operations. In agreeing to purchase Kentucky Fried Chicken, the company would acquire the second-largest restaurant chain behind McDonald's and would become the world's largest restaurant group.

1985 1984 1983 Sales (in billions): $8.1 $7.7 $7.9 Net income (in millions): $420 $207 $284

Assets: $2.8 billion

Employees: 150,000

Shares outstanding: 263.1 million

12-mo. price range (NYSE): $18.37 1/2-$35.62 1/2

Thursday's close: $33, up $1.12 1/2

RJR NABISCO AT A GLANCE

RJR Nabisco was formed in July, 1985, when cigarette maker R. J. Reynolds Industries, which owned Kentucky Fried Chicken, merged with food giant Nabisco Brands. The company is based in Winston-Salem, N.C. Its cigarette brands include Winston, Salem and Camel, and its food brands include Nabisco cookies and crackers, Del Monte, Oreo and Planters. Its Heublein subsidiary distributes Inglenook wines and Smirnoff liquors.

1985 1984 1983 Sales (in billions): $16.6 $13* $13.5* Net income (in millions): $1,001 $843* $835*

Assets: $5.7 billion

Employees: 147,000

Shares outstanding: 250.6 million

12-mo. price range (NYSE): $24.75-$55.12 1/2

Thursday's close: $52.62 1/2, up $3.25

*does not reflect Nabisco results

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